Malcolm Turnbull’s tax reform plan a work in progress
The Greek philosopher Heraclitus taught that the nature of reality is ongoing change. Though he lived 2500 years before the advent of Malcolm Turnbull, his insight fits the bill when it comes to the performance of this government so far.
In the space of the week we saw the ultimatum to the crossbench senators begin to erode as if on shifting sands. What started as a direction to pass two contentious industrial relations bills unamended lest there be a July 2 double-dissolution election morphed into a willingness to consider amendments or demands the independents were making to gain their support. Even the issue of some sort of corruption watchdogs in sectors beyond the construction industry is not being ruled out.
That raised serious doubts about Turnbull’s widely perceived intention of really wanting to call an election sooner rather than later. Nothing could be further from the truth if you took the prime minister of this week at his word rather than the Turnbull of the week before. “We want the bills passed; we don’t want a double dissolution,” was the latest message from the PM and senior ministers.
Some on the Liberal backbench are hoping there is a change of heart because the thought of a 100-day election campaign is causing them sleepless nights. Their insomnia is prompted by the prime minister and his senior colleagues not getting their messaging right, and doing so quite publicly. Turnbull insists he is leading a cabinet government, but an innocent bystander could be forgiven for thinking that important policies – indeed, key policies as they are being developed – are not being run by the executive. Or if they are, they are not being war gamed.
The lead-up to this week’s Council of Australian Governments meeting is just the latest example. The health minister, Sussan Ley, made the astonishing admission on ABC Radio that she would not be part of the hospital funding negotiations and did not know how much extra money was to be offered to the states. Not only that, Turnbull contradicted her criticism of Labor’s hospital funding reforms, reversing his government’s position. Last year she criticised them for “funding inefficiency and waste”. But the prime minister evidently agrees with her departmental head, who told senate estimates this month that Labor’s “National Efficient Price is a very good mechanism”.
On Wednesday, Turnbull looked and sounded decisive and enthusiastic as he announced a “once-in-a-generation reform” – a complete recasting of Australia’s taxation system that would hand back to the states income taxing powers they ceded to the Commonwealth in 1942 at the height of World War II. At the time it was thought imperative that there be a more efficient national approach to managing these revenues.
The fact that the announcement was made at Panthers leagues club in Western Sydney, in a doorstop without the treasurer present and without a detailed media release, suggested this was a work in progress. Surely, if it were the major reform it certainly sounded like, there would not have been so many loose ends. Labor’s Chris Bowen lampooned it as “another thought bubble”. His leader, Bill Shorten, thought it was sheer madness and he promised a Labor government would never do it. The opposition believes it would be an act of fiscal folly that would lead to long-term economic vandalism.
At his earlier news conference, Scott Morrison was more circumspect. Unlike the prime minister, he appeared to rule out giving the states the power to raise income taxes, merely to assure them of a share of the Commonwealth’s take. His guiding principle was whatever was done “would not increase the overall tax burden”. He also pointed out it was the states themselves that wanted discussions on a more sustainable and growth-enhancing tax mix and tax base.
Little wonder the states wanted this, as both the Abbott and Turnbull administrations foreshadowed a substantial cut in funding for their hospitals and schools. They would then be expected to pick up the slack. Joe Hockey as treasurer flagged an $80 billion cut over the next 10 years – a figure the Turnbull government recently fessed up to in a press release.
The treasurer shares the view of all his predecessors: that the biggest problem with the federation is the states spend the money but the feds are expected to collect most of it along with the opprobrium of doing so. Paul Keating as treasurer remarked famously and often: “Never stand between a state premier and a bucket of money.”
Turnbull thinks the spectacle of the premiers coming cap in hand is unseemly. He says it happens every year and often several times a year. So his bold plan is to reduce the Commonwealth’s share by a fixed amount – 2 percentage points was put on the table – and then hand that over to the states. But the prime minister then radically departed from his treasurer. He said in the longer term the states would be able to either lower or increase their income tax take depending on their circumstances. The attraction for him was that it would then be the states taking all the responsibility.
When this version of the proposal was put to Morrison on Sky Business, he said: “the prime minister I don’t think has gone that far ultimately.” He went on to describe the proposal as “an idea”. Makes you wonder what the two men sorted out at the all-day meeting at Turnbull’s Point Piper mansion on Monday.
Whether the “idea”, “plan” or “proposal” goes the way of the 15 per cent GST is in the lap of the gods. The premiers’ first reactions weren’t exactly wild with enthusiasm. South Australia’s Jay Weatherill, who came up with an idea closer to Morrison’s, thought Turnbull’s wouldn’t fly. He didn’t think there was any support anywhere for double taxation, because it’s not practical. He says, “I can’t imagine any state taking advantage of it.”
Economist Stephen Koukoulas, who was an adviser to prime minister Julia Gillard, sees some advantages. The states would be more masters of their own destiny in essential areas of responsibility. But against that would be the enormous red tape involved. “You’re going to be having potentially nine different income tax rules,” he says. “One for each state and territory and for the federal government as well.” The complications were made starker for people who earn their incomes in more than one state. An electrician who, for example, has customers in Tweed Heads and Coolangatta could face three different income tax bills.
In 2014, then prime minister Tony Abbott rejected the recommendation of his Commission of Audit to give the states access to the personal income tax system “so they are in a better position to fund their own priorities”. At the time, Abbott said the last thing he wanted to see was any idea of double taxation. “Speaking for myself, I want to see lower, simpler, fairer taxes over time. I want to stress that – lower, simpler, fairer taxes.”
Turnbull may be laying the groundwork for lower federal income tax but by offering the states the possibility of raising their own he is in fact proposing a pea-and-thimble trick on taxpayers. The “pea” disappears from his thimble, only to reappear under the states’. Labor certainly suspects his latter-day conversion to old-style conservative federalism is to make his budget bottom line look better ahead of the election.
At least he acknowledges that services need to be paid for. Morrison is firmly of the view that the only acceptable way to keep doing this is by making them more efficient or even cutting them. Here, he is more in tune with Abbott’s 2014 budget. This is thinking that the former prime minister has been recently spouting again by attacking new “Labor taxes”.
These views are certainly out of tune with the influential business-backed economic think tank, the Committee for Economic Development of Australia. Its chairman, Paul McClintock, released a report this week saying the only credible way to repair the budget and keep up our standard of living was to raise taxes. In an address to the National Press Club, he endorsed Labor’s approach by nominating raising taxes on luxury cars, alcohol and tobacco, removing negative gearing on certain assets, and removing private health rebate exemptions, among others.
Curiously, Morrison says “you can’t tax your way to surplus”. He repeated the line three times at a news conference. Tell that to Peter Costello. The revenue that gave him his surpluses was just that: revenue. It was taxes on companies making a fortune from commodities at the height of the boom. That income is no longer there. Replacing it by taking away a lot of the generosity it allowed the top end would appear a no-brainer.
Cabinet government may yet embrace this path. In the meantime, Turnbull’s agility would make Heraclitus proud.
This article was first published in the print edition of The Saturday Paper on Apr 2, 2016 as "Clear and present changer". Subscribe here.